Nifty to remain between 5,500-6,000

The Nifty has crashed in the past four sessions. The break above 6,070 on December 30, 2010, created higher highs and seemed to indicate an uptrend. But on January 5, the slide started and the market dropped from the 2011 high of 6,181 to a recent low of 5,741 (January 10). However, the intermediate pattern reversal isn't absolutely confirmed. The most recent intermediate low was 5,690 (November 26, 2010) and that mark hasn't been broken yet.

The indications are bearish. Breadth is poor, volumes are high in counters that have been sold down. A drop below 5,690 could mean a slide till around 5,500. The 200 day moving averages are around 5,600 (simple MA) and 5,650 (exponential MA) so the major market trend is in jeopardy. FIIs have returned in 2011 but they've been heavy net sellers and the domestic institutions are not strong buyers. So there's downwards institutional pressure.

In the near future, if the Nifty holds above 5,650-5,700, we'll assume the major bull market continues. If the 200 DMAs are broken, traders and investors must reconsider their long-term strategies since we may be in a new bear market.

Temporary short-covering could pull the market back till just above 6,000 level. A reversal to bullish sentiment would take the market back above 6,100 and perhaps, past 6,150. Inside that 5,700-6,100 zone, supports and resistances exist at roughly 50-point intervals.

Open interest is reasonable but index put-call ratios are negative. The VIX has jumped reflecting the market's nervousness. The Nifty's overall PCR is bearish at 0.9 while the January PCR is around 1, which is on the edge of bearish.

Of the subsidiary indices, the CNXIT could provide some sort of counterweight, especially if the rupee weakens more. But the CNXIT is in correction mode and testing key support 7,300-7,350. The BankNifty is under pressure and it has crucial support at 10,350-10,500 with resistance at 11,000.

Traders should stay braced for moves between 5,500 and 6,000 in the next three-five sessions. Close to money Jan bearspsreads have better risk:reward ratios than Jan bullspreads. However both sets of CTM spreads have decent risk:reward ratios.

A long Jan 5,800c (92) and short 5,900c (54) costs around 38 and pays a maximum of 62. A Jan bearspread of long 5,700p (84) and short 5,600p (55) costs 29 and pays a maximum 71. The underlying is almost midway at 2,762.

Earlier we had recommend a long-short Jan strangle with long 6,300c (36: premium on Jan 3), long 6,000p (41: Jan 3), and short 6,500c (14:Jan 3) and short 5,800p (6: Jan 3) for a net cost of 57 with breakevens at 5,943; 6,357. The short end should be closed, reversing with short 6,000p (260 Jan 10 premium) and long 5,800p (125: Jan 10 premium).

A new long-short strangle could be taken with long 6,000c (30), long 5,600p (55) and short 6,100c (16) and short 5,500p (35). This has a net cost of 34 and a potential maximum return of 66 if 5,500 or 6,100 are hit within January 27.